Explain the importance of internal control and risk management

Organizations face a wide range of uncertain internal and external factors that may affect achievement of their objectives—whether they are strategic, operational, or financial. The effect of this uncertainty on their objectives can be a positive risk (opportunities) or a negative risk (threats).

The directors of a company are responsible for ensuring that a company's risk management and internal

controlssystems are effective.

Internal control is the process designed, implemented and maintained by those charged with governance,management, and other personnel to provide reasonable assurance about the achievement of the entity'sobjectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations.An understanding of internal control assists the auditor in identifying types of potential misstatements andfactors that affect the risks of material misstatement, and in designing the nature, timing and extent offurther audit procedures.

Internal control objectives To ensure that:

 Only genuine staff are paid for work performed.

 Gross pay has been calculated correctly.

 Deductions from gross pay are calculated and recorded accurately.

 The correct employees are paid what they are entitled to.

 Wages and salaries paid are accurately recorded in the bank and cash records.

 The right amounts due in respect of tax and national insurance are paid to the relevant

authority on a timely basis.

Internal controls are essential to management, as they contribute to:

• Safeguarding the company's assets

• Helping to prevent and detect fraud

• Safeguarding the shareholders' investment

Good internal control helps the business to run efficiently. A control system reduces identified risks to thebusiness. It also helps to ensure reliability of reporting and compliance with laws.

Risk management focuses on identifying threats and opportunities, while internal control helps counter threats and take advantage of opportunities.Proper risk management and internal control assist organizations in making informed decisions about the level of risk that they want to take and implementing the necessary controls to effectively pursue their objectives.

Risk management and internal control are therefore important aspects of an organization’s governance, management, and operations. Successful organizations integrate effective governance structures and processes with performance-focused risk management and internal control at every level of an organization and across all operations.

However, risk management and internal control are not objectives in themselves. They should always be considered when setting and achieving organizational objectives and creating, enhancing, and protecting stakeholder value.

Recent financial crises have exposed flawed or ineffective risk management and internal control practices—especially in some financial institutions. Many organizations were overly focused on financial reporting controls, and did not fully comprehend the risks to which they were exposed. In fact, many, if not most, of the risks derived from other areas, including operations and external circumstances.